Contractors alerted to Lifetime ISA penalty

A hefty 25% withdrawal charge is the unpalatable part for contractors of the now available Lifetime ISA, an independent worker body is warning.

Although it applies to most withdrawals (from April 5^th 2018) and all LISA-holders, the charge is a particular blow to contractors because their incomes typically fluctuate, said IPSE.

So such people who work for themselves, with variable earnings, have more cause to want to access the £4,000 tax-free that a LISA can stash, but will be heavily penalised if they do.

In fact, only in three narrow conditions would extracting their money not incur contractors the 25% charge, the government stipulates, such as if they become terminally ill.

The Association of Independent Professionals the Self-Employed (IPSE) says the eligibility of LISAs is restrictive too, as they are only available to 18-39-year-olds.

But the penalty is IPSE’s main gripe. “Self-employed incomes are variable and people should be aware of the large 25 per cent penalty for removing finances.

“The self-employed have volatile, irregular incomes so a penalty-free withdrawal would alleviate the significant penalty if they do need to access their money,” the association said.

Designed to help the self-employed, specifically when buying a property or saving for retirement, a LISA can stash up to £4,000 a year tax-free, until the saver is 50.

The government adds in a 25% bonus (on the total amount paid in, so not interest and not investment growth) upon withdrawal of the cash, but only after the saver’s 60^th birthday.

“[The LISA] is certainly a step in the right direction and the young self-employed, in particular, would be wise to take advantage…[but] it’s not for everybody,” said IPSE’s Lorence Nye.

“[That’s why we are] calling for removing or lowering the financial penalty to accommodate for self-employed variable income.”